Medtronic slashing workforce

For the third spring in a row, Medtronic has announced job cuts in Minnesota in response to sluggish growth in key markets for the company's medical devices.

The Fridley-based manufacturer announced during a conference call Tuesday, May 21, that it is eliminating 2,000 jobs worldwide, including about 500 positions in Minnesota.

About half the worldwide cuts are hitting the company's workforce in the United States, said Gary Ellis, the company's chief financial officer. Many cuts in the U.S. and around the world are related to consolidation in manufacturing, Ellis added while discussing fourth-quarter earnings.

The goal of the restructuring is to "align people to where the growth opportunities are," said Omar Ishrak, the company's chief executive officer, during an interview. He added: "There are instances where we can consolidate manufacturing facilities and leverage the scale of a bigger facility for reduced cost."

Medtronic is one of the world's largest medical-device manufacturers and the largest based in Minnesota. It employs about 8,000 people in the state and helped launch a vibrant cluster of medical device companies in the Twin Cities after developing the world's first wearable battery-powered external pacemaker in the 1950s.

But demand has languished in Medtronic's two largest product areas -- heart rhythm devices and products used in spine surgery.

"Their core markets have continued to shrink. It's been a bit surprising that the decline has been so durable," said Tim Nelson, an analyst in Minneapolis with Nuveen Asset Management.

Advertisement

"Every year, it gets around to budgeting time, and to make the numbers they have to find ways to get more efficient."

The new job cuts are focused on "slow growing geographies and divisions," Ishrak told investors during the conference call.

"Some of our businesses, such as our spine business and some of our cardiac rhythm businesses, are in end markets that are not growing as rapidly as others," Ishrak said in the interview. In terms of geography, he added, U.S. and European sales are lagging the growth rate elsewhere.

It's been a similar story the past two springs, although the magnitude of local job cuts is larger this time.

In May 2012 Medtronic announced it would eliminate 1,000 jobs, including 250 in the Twin Cities. In April 2011 the company said it would eliminate 268 local jobs as part of cuts that pruned 2,000 positions from Medtronic's global workforce.

From 2007 through 2009, Medtronic also made annual announcements of job cuts near the end of its fiscal year in late April. Those three instances eliminated about 1,100 local jobs combined. Even so, Medtronic's current worldwide head-count of about 45,000 matches the total from a year ago, the company said. The number of jobs in Minnesota also has held steady.

By cutting jobs in some places while hiring elsewhere in the company, Medtronic winds up shifting of resources from lower-growth businesses to higher-growth divisions, officials say. While Medtronic is eliminating 500 jobs in Minnesota, the company has added 160 positions in the state, said Cindy Resman, a company spokeswoman.

"We also currently have job postings online for around 130 positions in (Minnesota)," Resman wrote in an email. "We are growing in some areas."

About two-thirds of the current reductions already have taken place, she said, adding that affected employees are being offering severance and out-placement services. Almost all affected employees in Minnesota were notified about reductions before Tuesday, Resman said.

For years, Medtronic's division for heart rhythm devices, based in Mounds View, has been the company's largest source of revenue. It includes pacemakers as well as implantable defibrillators, which shock failing hearts back into rhythm.

The heart rhythm market has struggled, however, due to a variety of factors including price pressure from hospital customers and questions about whether defibrillators -- at a cost of up to $30,000 each -- have been overused. There's also been a history of recalls in the past 10 years that have hit not just Medtronic, but also rivals St. Jude Medical and Boston Scientific.

Based in Little Canada, St. Jude Medical makes pacemakers and defibrillators in California and employs about 2,800 people in Minnesota. Boston Scientific is based in Natick, Mass., but operates two large divisions here -- one in Arden Hills for pacemakers and defibrillators, another in Maple Grove for heart stents.

Boston Scientific won't say how many people it employs here, but past statements have put the number at roughly 5,000.

"It just keeps getting harder and harder -- margins are squeezed more and more," said Thomas Gunderson, an analyst in Minneapolis with Piper Jaffray. "The hospital is increasingly asking for more concessions, and as you do that you've got to save money someplace."

Another large Medtronic division -- the company's Memphis, Tenn.-based business in spine surgery devices -- has struggled, both from competitive pressures and questions about the safety and effectiveness of a key product called Infuse.

The cuts Tuesday are part of a plan expected to generate $200 million to $225 million in annual savings, said Ellis, the chief financial officer. It means that Medtronic's Fridley-based division for neurology devices will "probably draw a few more resources," Ishrak said.

In the fourth quarter, which ended April 26, Medtronic reported revenue of $4.46 billion, an increase of 4 percent over $4.39 billion in sales during the same period last year. Profit of $969 million, or 95 cents per share, was down about 2 percent.

After eliminating one-time costs, adjusted earnings per share came in at $1.10, better than the $1.03 per share expected among analysts surveyed by Thomson Reuters.

"We had a relatively strong finish to a pretty solid year," Ishrak said of the overall performance. "We need to do this for several quarters over a longer period of time."